When Your Income Drops

A sudden reduction in family income can be a traumatic experience, both psychologically and financially, but the hardship can be minimized with a proactive approach.

First, don’t panic. Allow time to get over the initial shock, and then start making plans. Don’t blame yourself or anyone else. Concentrate, instead, on dealing with the situation.

Inventory family and community resources. Accept that many aspects of your life will be different, at least for a while, but you and your family can still maintain control of your household financial affairs. Realize that family income will be reduced and that spending must be reduced. Begin making adjustments immediately by involving the whole family in setting spending priorities. Develop a plan to pay creditors and protect family well-being.

Concentrate on maintaining positive family relationships and preventing financial pressures from destroying these bonds. Consider the feelings of others. Be especially sensitive to children’s understanding of the circumstances. Help children understand that although reduced income is a serious problem, it does not change the importance of any individual in the family. By working together, family members can more easily address the new challenges they now face.

First things First: Examine Family Resources
Good financial management begins with examining your family’s current financial position or net worth. Net worth shows how much a family is worth in dollars and cents at a particular point; it equals the difference between what you OWN and what you OWE. A net worth statement provides a picture of your current financial situation.

Second, list your family’s non-financial resources that can be used to cut cost, traded for goods and services, sold to raise money or used to generate income. Each family member can likely contribute toward more economical household operations. Be creative in assessing all of your resources and how they can best be used to address hard economic times.

Your circumstances may imply the need to use emergency savings or take out a loan. If you have followed the principles of good financial management, you will have the equivalent of a few months' salary accumulated in liquid savings. Withdraw from passbook savings first, since there will be a penalty if you cash in certificates of deposit (CD). If it is necessary to cash in a CD, consult the financial institution where you purchased it to determine how much interest you will lose by cashing it in before maturity. It may be less costly to obtain a short-term loan using your CD as collateral.
 
A second option might be to borrow against a cash value life insurance policy at a low rate of interest. Regardless, remember that a loan must be paid back and that emergency savings should be replenished as soon as possible.

Control Spending
Take immediate action to stop all excess spending. Research has found that many families do not adjust their lifestyles for about six months after their income is reduced. Waiting can spell disaster. By taking charge of your financial situation immediately, you will make a positive contribution to your family’s well-being now and in the future.

Following the basic money management principles listed below can reduce stress and help you adjust to living on a reduced income.

• List the family’s most important expenses.
• Make a family spending plan to determine where your money will go. Family input is essential in formulating a realistic, flexible plan.
• Separate your expenses into fixed and flexible categories. Give higher priority to fixed expenses which include mortgage payments or rent, installment credit, emergency savings, medical and life insurance payments, utilities, etc. Flexible expenses such as food, utilities, clothing, recreation and household expenses can be more easily adjusted to fit your income.
• Follow your spending plan carefully. With less income, each spending decision is critical. When all family members work together to control spending, you are more likely to succeed.

Reduce Debt
Don’t put off regular payments on consumer debt. List all of your debts, the annual percentage rate, specific contract terms and finance charges. The largest and most essential payment is likely your mortgage. If it is unmanageable in your present situation, contact the lender and see if you can refinance, or pay only the interest for a short period of time, or postpone one or two payments. Although these methods may increase the overall cost of your loan, you will not run the risk of losing your home.

For other debts, contact the lender immediately to explain your situation and propose an alternate payment plan. It is best, if possible, to schedule an appointment and talk personally with the person in charge. Many people do not realize that they can negotiate with creditors. You may wish to propose making smaller payments or paying only the finance charge for a short period. You may need to reduce payments on revolving accounts to the minimum until your income increases and you can resume your regular payment schedule. This will increase the total amount you must pay for the debt, but it will ease your present financial burden.

Another solution may be to refinance the loan, making a new contract for smaller payments over a longer period. Again, this will increase the overall cost of the loan and, in the case of a mortgage, will involve paying additional closing costs.

Set priorities if you can pay some debt, but not all. Pay those bills that:

• Maintain vital services (utilities, phone, transportation, insurance)
• Have the highest interest rate
• Cost the most to postpone (late penalty, repossession or disconnect/reconnect charges)
• May be vigorously collected.

As a final alternative to repaying debt, consider a consolidation loan. These loans enable consumers to pay all bills at once, and then make one payment monthly for a large loan. Be sure to shop around for the best terms if you decide to obtain a consolidation loan. There may be additional fees involved in taking out a new loan, and consolidation loans are frequently very costly. However, consolidation loans may prevent repossession and help you avoid bankruptcy.

If your financial affairs have declined beyond repair, bankruptcy may be the last resort; however, bankruptcy should be scrutinized carefully. It remains on your credit history for 10 years and jeopardizes your credit rating.

Control Stress
Severe and prolonged stress associated with reduced income may seriously affect your physical and mental health. Additionally, it may contribute to accidents through human error, fatigue, worry and haste.

Check out Community Resources
Many state and local resources assist those coping with unemployment or other loss of income. Check with your local LSU AgCenter Extension office for information on resources available in your area.

When You Are Back On Your Feet
When your financial situation improves, be careful to resist the urge to overspend to “catch up” on all the things you have put off buying and doing. Just as the family needed to decide which purchases should be delayed, families should decide which purchases should be made first.

Negotiations with lenders or a consolidation loan may have given you security in hard times, but there may be new debts that need to be paid or an emergency fund that needs to be restored (three to six months' living expenses). Because you have successfully dealt with your financial crisis, you will have a more realistic idea of what size your emergency fund should be in the future.

References
Adjusting to Suddenly Reduced Income: Reassessing How the Money Will Be Used. (2001). (BU-06499). University of Minnesota Extension Service.

Getting Through Tough Times: Strategies for Spending Less. (1999). (GTTT-2). University of Illinois Extension.

Pankow, D. (1998). What To Do When Your Income Drops. (FE-274). North Dakota State University Extension Service.